Economists say the U.S. core Personal Consumption Expenditures (PCE) Price Index for May may be revised downward once the Bureau of Economic Analysis (BEA) changes its price measurement methods later this year.
The BEA last week announced planned updates to the way it measures prices for a set of categories that include portfolio management and investment advice services, legal services, and computer software and accessories. These methodological adjustments will become effective with the BEA's annual gross domestic product revisions on September 30 and will be applied to figures going back to 2021.
The PCE price indexes are published as part of the monthly personal income and outlays report and are the Federal Reserve's preferred gauge of inflation for its 2% target. As a result, changes to how component prices are calculated can alter the official inflation trajectory reported in that series.
Two major bank research teams have quantified the likely effect of the BEA's revisions on the May reading for core PCE. Goldman Sachs economists estimate that the year-over-year increase in core PCE for May could fall to 3.2% from the 3.4% level the BEA reported last week. JPMorgan has projected a smaller decline, to 3.3% after rounding.
The BEA provided detail on one specific change for the "computer software and accessories" category. The agency will shift to a composite price index that blends data from the Consumer Price Index (CPI) and the Producer Price Index (PPI). That composite will incorporate PPI components such as game software publishing and hosting and information technology infrastructure provisioning. Under the current methodology, the BEA relies exclusively on CPI data for this category.
Because the revision extends across multiple categories and is applied retroactively to 2021, the updated PCE series released with the September GDP revisions could show systematically different inflation readings than those currently published. The precise magnitude of the overall change will depend on the aggregated effect across the revised categories.
What to watch
- How the composite CPI-PPI approach for software and accessories alters the price trend recorded in that component.
- How retroactive adjustments to 2021 data shift the year-over-year core PCE trajectory reported for recent months, including May.
- Market reactions to any downward revision in the Fed's preferred inflation gauge when updated data are published with the September GDP revisions.